Monday, June 7, 2010

Commodity prices have not collapsed


Lots of talk these days about how commodity prices have collapsed and are therefore predicting an imminent double-dip recession. Just to put that in perspective, here's an updated version of one of my favorite commodity price indices, the CRB Spot. Many of its components (see fine print in chart) are just basic industrial stuff, and not subject to futures-related speculation. Yes, the index has fallen since April, but it is only down 7% from its recent, all-time high. It is still up about 40% from its low at the end of 2008, and up 102% from its low in late 2001, which is when most commodities hit bottom—that works out to an annualized gain of almost 8%, which is not too shabby considering that the S&P 500 has not advanced at all during that same period. Just looking at the chart tells me that commodities have had a tremendous runup, and the recent correction is nothing more than that—just a correction. The message here continues to be that global demand is strong and prices are also being supported by easy money. This is a reflation signal, not a double-dip indicator.

11 comments:

Kenneth said...

Scott,

Maybe people are more worried about the tax increases scheduled for January 1, 2011 as indicated in Art Laffer's article in the WSJ today. What do you think the higher tax rates will mean for economic growth as we move into 2011? Seems like a huge negative unless Republicans recapture Congress and can extend current law.

John said...

Ken,

Scott commented on Dr. Laffer's article earlier this AM under the 'Federal Debt' post below.

Kenneth said...

Thanks John for pointing out Scott's earlier comment. I don't normally read all the comments to Scott's posts but I will be after this.

puffer said...

Scott -

Don't you pay any attention to stock prices of these commodity companies as leading indicators?There is a reason stocks like FCX, X, and AA are all down more than 30% in a couple of months - the slowdown will soon be upon us...global growth will be much weaker than consensus... prices for the commodities themselves will be falling.

septizoniom said...

pay no attention to the man behind the curtain

Public Library said...

The punch bowl is drying up. Hang on to your trousers. The second half of 2010 and first half of 2011 should be a fantastic ride.

Scott Grannis said...

puffer: is the glass half full or half empty? FCX is down 30% from its April high, but up 285% from its 2008 low. I grant you that the markets seem engulfed by fears of a double-dip recession, but I think it's based more on fear than reality.

John said...

Public,

What are you riding?

Inquiring minds want to know!

puffer said...

Scott -

I'm just looking at stocks as leading indicators of what's coming down the line. Commodity stocks are signaling weaker commodity prices ahead. How much the stocks ran prior to their descent does not tell us anything useful about where we are going now (see Fall '08/Winter '09).

John said...

Puffer,

As I have mentioned before, I am not belittling the problems the financial world faces. The headwinds are considerable and will blow for a long time. Commodity prices correcting from their highs are a concern. There is a correlation between copper and the S&P 500 that is interesting. However, declining stock and commodity prices such as copper do not ALWAYS predict a recession. Markets can and do deviate from economic fundamentals for long periods of time. I believe we are in such a time now. I am quite wary of the potential for a 'double dip' recession. If it materializes, stock markets around the world will need to go considerably lower while the world's debt troubles will be more difficult to deal with. For now, the weight of the evidence I see does not point to another global recession in the near term. For me, this holds the key to the world's debt troubles. A growing economy will allow necessary restructurings of weaker countries' unrefundable debt and time for stronger debt laden countries to regear their national budgets to cope with the demands of their creditors.

Money is afraid right now, and with good reason. Botched government policies in the past do not instill confidence that they will get it right next time. Some will not and their economies will pay. We are likely in for several more months of indecision before we know whether this global economy, led by the USA and Asia, not Europe, can sustain itself. If it can, the odds are high IMO we will muddle through the crisis. If not, much more defensive actions will be necessary.

John said...

I do not attach a tremendous amount of weight to this but today McDonalds (MCD-NYSE) announced same store sales numbers. It was a little bit surprising to me that Europe led the USA and Asia with a 5.7% increase vs 3.4% and 3.7% respectively.

The market is ANTICIPATING a big slowdown in Europe...hasn't happened...yet.